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24.9 APPENDIX 24.2 Aggregate Demand and Supply: A Numerical Example
- Consider the following aggregate demand curve Y= 22-1p and a short-run aggregate supply
curve given by: p=4+3(Y-10). Find the equilibrium output and inflation rate.
Answer: Y=22-pi. Subsitutate in pi from the short run aggregate supply curve.
Y=22-(4+3(Y-10))
Y=22- 4 - 3Y+30
Y+3Y=48
4Y=48
Y=12
Plug this into the aggregate supply curve
p=4+3(Y-10)
p=4+3(12-10)
p=4+3(2)
p=10
Diff: 2 Type: SA Page Ref: 24.2A- 2
Skill: Applied
Objective List: 24.1 Interpret the aggregate demand and supply framework for the determination
of aggregate output and the inflation rate
24.10 APPENDIX 24.3 The Algebra of the Aggregate Demand and Supply Model
- Enumerate the four implications for aggregate output from algebraic expression of the
aggregate demand curve.
Answer:
- The aggregate demand curve slopes downward.
- The more willing monetary policymakers are to raise interest rates when faced with inflation,
the steeper the AD curve is. - C, -mpc × T, -df, G and NX shift the aggregate demand curve by exactly the same amount and
in the same direction as they shift the IS curve. - An autonomous easing of monetary policy results in a higher level of equilibrium output,
shifting the aggregate demand curve to the right.
Diff: 2 Type: SA Page Ref: 24.3A- 2
Skill: Recall
Objective List: Appendix: The Algebra of the Aggregate Demand and Supply Model